One Down, Two to Go: 113th Congress Faces More Than Just Tax Reform

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Injured Piggy Bank WIth CrutchesLate on January 1, the 112th Congress reached a post-last-minute deal that prevented the worst of the fiscal cliff. The deal mainly addressed taxes, which will most notably rise on individuals earning more than $400,000 a year, and households earning more than $450,000 a year, while those earning less will continue at the current rate. Among other changes, the payroll tax holiday was also ended.

The tax agreement puts a wrap on the New Year and concludes the 112th Congress. For better or worse, the 113th Congress will be sworn in on January 3 and pick up right where its predecessor left off: facing monumental and divisive economic problems.

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The tax deal addresses just half of the fiscal cliff and none of the debt ceiling, which the country hit on December 31. In a letter to Congress, Treasury Secretary Timothy Geithner warned that he would have to take “certain extraordinary measures” to delay default for two months, the amount of time that Congress delayed the sequester, which is the other half of the fiscal cliff.

With another political showdown shaping up on Capitol Hill, market participants who celebrated the tax deal on Wednesday are responding more tepidly on Thursday. Stock futures traded fractionally lower in the pre-market, foreshadowing slight drops in the major indices as they opened for regular trading. Policymakers and investors, both exhausted by the fiscal cliff drama, are looking ahead to budget talks framed by statements like this:

“Our opportunity here is on the debt ceiling. We Republicans need to be willing to tolerate a temporary, partial government shutdown, which is what that could mean,” Senator Pat Toomey (R-Penn.) told MSNBC.

House Minority Leader Nancy Pelosi (D-Calif.) told NBC, “We believe that passing this legislation greatly strengthens the president’s hand in negotiations that come next.”

In other words, Republicans are looking for things to go their way after making unwanted concessions on taxes. Democrats are riding high on their victory, and are also looking for things to go their way in the budget and sequester talks. It’s a brewing storm and investors are going to have figure out how to sail through it.

At 10:34 a.m.: DJIA: -0.13%, S&P 500: -0.03%, Nasdaq: +0.01%.

Oil was pretty much flat at $93.08, Gold dropped half a percent to $1,679.70 per ounce, while 10-year Treasury yields were up to 1.851 percent.

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